Analyze Me!

September 10, 2011

ST: Banking in Singapore

Come one, come all

By Andy Mukherjee

IN JULY, some business acquaintances approached Mr Nikhil Srinivasan, the Munich-based group chief investment officer of Allianz Investment Management, with a request: Could he get them a meeting with the Monetary Authority of Singapore (MAS)?

The people seeking an audience with the MAS were from the family investment office of a 'very reputable' European business house interested in setting up an asset management business here, says Mr Srinivasan, who was born in India but is now a naturalised Singaporean.

There is a self-reinforcing circularity in global banking: First, bankers move closer to where the money is. Next, money moves where the bankers are.

Singapore has already crossed the first stage of development. As a private banking hub serving the ultra-rich and the merely wealthy, it's already 'the Zurich of the East', says Mr Jeremy Anderson, the London-based chairman of the global financial services practice at KPMG.

Now that the banks have all pitched their tents here, the second part of the story is unfolding. Investors, such as the European family office that tapped Mr Srinivasan, want to bring in their own funds and manage them from here.

'Singapore is much more important in the world of money than it used to be,' Mr Srinivasan says. 'The financial ecosystem here is richer now than before. More participants are keen to come here.'

Asset management may be the next industry to watch. In its report, titled See The Future, PricewaterhouseCoopers predicts that by 2025 Singapore will attract enough of the 'internationally footloose capital' to emerge as the world's second-largest centre for asset management after New York, and ahead of London.

'It's the integrity of the environment here,' explains Mr Jose Isidro Camacho, the former Philippine finance secretary who is now the vice-chairman of Credit

Suisse in the Asia-Pacific. Recently, the bank chose Singapore as the hub for its emerging-market asset management business. Singapore is already the largest wealth management centre for Credit Suisse outside of Switzerland.

'We have doubled here in the last five years,' Mr Camacho adds, referring to the growth in Credit Suisse's employee base in Singapore to more than 5,000 at present. 'And we would hardly be alone in that.'

Intense competition for talent

SUCCESS creates its own unique challenges. In March this year, about 175,000 men and women in Singapore - or 5.6 per cent of the working residents - were employed by financial services and insurance companies. In seven years, financial sector employment in Singapore has risen 62 per cent. That is three times the employment growth in manufacturing in the same period.

Rapid expansion has made finding the right people, at the right time and the right price, the biggest headache for banks and other financial firms here.

'Competition for talent is fierce,' says Mr Camacho. 'It isn't just our global peers; we are also competing with local and regional banks. Inflation of compensation has made it more difficult to protect margins.'

Unless the global economy nosedives between now and December, Singapore will probably be able to look back at 2011 as a year in which it crossed an important milestone on its way to fulfilling its ambition of ranking alongside the world's most prominent global financial centres.

In March, the so-called Asian dollar market here topped US$1 trillion (S$1.2 trillion) in assets for the first time. That is about five times the size of Singapore's economy.

The Asian dollar market came into existence in Singapore in 1968 to make available US dollars and other hard currencies to banks, companies, individuals and sovereigns around the world at those hours of the day when it was too late for New York - and too early for London - to conduct such business.

Even today, the market primarily serves borrowers outside Singapore, with resident customers other than banks accounting for just 10 per cent of the total Asian dollar assets of institutions here.

In the short run, a murky global economic outlook and jittery markets could put pressure on financial flows channelled through Singapore. Depending on the severity of the shock, the time taken to recover from it could be anywhere from a few months to between three and seven years.

Or at least that is what past experience suggests: In the aftermath of the Asian financial crisis, assets in the Asian dollar market here took seven long years to reclaim the highs of 1997; the slump of 2008 cost Singapore three years in lost time and financial flows.

A repeat of those episodes cannot be ruled out. After topping US$1 trillion in March, Asian dollar assets increased further in April; and then in May and June, growth stalled. Financial-industry headhunters will be keeping a close eye on this statistic. If the number continues to slide, they may as well go on a long vacation.

'Both corporate and transaction banking sectors are likely to remain stagnant or hire opportunistically,' Robert Walters, a recruitment firm, says in its recent update of the employment outlook for the financial services industry here.

In the past three months, European financial institutions, including HSBC, Lloyds, UBS and Royal Bank of Scotland, have announced more than 60,000 job cuts globally. Bank of America has said it would prune headcount by 3,500.

But any pain that is felt by international banks, bankers and the bankers' landlords here will be transitory. In the medium to long run, gains in this part of Singapore's financial industry may be nothing short of bountiful.

Asia's growth offers opportunities

ONE reason is economic expansion in Asia to which the fate of the banking industry here is closely and inextricably tied.

'Asia is the flavour of our times,' says Mr Shirish Apte, one of Citigroup's two chief executives for the Asia-Pacific. 'A lot of people in our industry are saying they want to move to Asia - the two options are Singapore and Hong Kong.'

Contrast this optimistic scenario with the grim outlook for growth facing banks in more developed economies that have, thanks to their incontinent governments, already feasted on so much credit that they will not have much appetite for debt for decades to come. 'Banks in North America and Europe have huge challenges in figuring out where growth is going to come from,' says Mr Anderson of KPMG.

Incessant banker-bashing in the West is also going to send more business Singapore's way. What is more, Singapore will not have to bend over backwards by embracing regulation that is too soft to make banks and bankers welcome here.

'I would be astonished if there was substantial difference in capital or liquidity requirements for financial institutions in Asia compared with the rest of the world,' says Mr Anderson. 'But in the West, the tone of regulation is becoming adversarial. And that's going to make a difference.'

Banking in Singapore is like an iceberg. The part that has nothing to do with financing the local economy, and is submerged from public view, is 1.5 times the size of domestic banking. But the less visible part of banking is no less important.

Take the financing of commodity trades. Large commodity traders such as Wilmar International and Olam International are headquartered in Singapore, while Cargill runs its Asia-Pacific business from here. Singapore also has a full-fledged commodity trading bourse now in the form of the one-year-old Singapore Mercantile Exchange. The building blocks are in place for Singapore to increase its share of financing of cross-border trade. As intra-regional commerce expands in Asia, Singapore will become an even more prominent trade-finance hub than now, Mr Apte of Citigroup says.

Greater exchange of goods and services among Asian countries will also create new opportunities for trading of currencies and exchange-rate derivatives. That, too, is good news for Singapore, which is already the fourth-largest centre for such transactions after London, New York and Tokyo.

In April, the average daily volume of the traditional currency-trading business here - spot trades, forwards and foreign-exchange swaps - was US$314 billion, a 13 per cent increase from six months earlier, according to a twice-a-year survey by the Singapore Foreign Exchange Market Committee. A big chunk of the volume came from trading US dollars against euros. Over time, that is bound to change.

'Today, only a small percentage of the overall China trade is denominated in renminbi,' Mr Apte says. 'Given the size of the Chinese economy and the trade flows, one would expect renminbi to play a more important role in future. It will even become a part of the non-China trade.'

Funding needs of Asian - and in particular Chinese - companies are driving the growth agenda at global banks. Citigroup, which helped its corporate clients in the Asia-Pacific raise US$75 billion in the first half of this year from international capital markets, has recently opened China desks in the US, Britain, Brazil, South Africa, Dubai and Singapore to serve multinational Chinese customers.

Capital markets a weak spot

THANKS to its proximity to the booming economy of mainland China, Hong Kong is way ahead of Singapore in investment banking and capital markets-related activities. Last year, issuers raised more than US$54 billion in initial public offerings in Hong Kong, making it the second-biggest city for IPO fund-raising after New York. Shenzhen in China came in third place. Globally, the Singapore Exchange (SGX) was not even in the top five, KPMG's analysis shows.

In the first half of this year, Hong Kong equity offerings generated about US$500 million in investment banking fees, almost double the money underwriters made on equity issuances in Singapore, according to Bloomberg data.

The Singapore bourse's efforts to become a worthy challenger to the Hong Kong stock exchange received a blow this year when SGX failed to secure regulatory clearances to buy ASX, the operator of the Australian bourse. Still, experts say it is only a matter of time before Singapore's public capital markets grow in relevance, depth and stature. Last month, the bourse installed the world's fastest trading engine, a move that is expected to enhance liquidity. What it needs now are a few marquee names to sell stock here.

Excitement is building up around a possible US$1 billion stock offering here by debt-laden English soccer club Manchester United. If the Red Devils' issue succeeds, it will go a long way in boosting investor sentiment, which has been dented by a series of disappointments.

Of the 69 IPOs priced here since January 2009, only a handful - fewer than 20 - are currently trading above their initial offering prices, even though over this period the benchmark Straits Times Index has jumped 56 per cent. Other Asian markets have performed better in this regard. That begs the question if issues on SGX are so aggressively priced as to leave nothing on the table for investors.

'Soft' infrastructure crucial

FUTURE growth of the financial services industry in Singapore will, in large part, be determined by the real and perceived openness of the economy - not only to overseas capital, but also to foreign talent. 'If there were severe constraints on our ability to bring in talent, there would be an impact, not only on growing the business but also on sustaining it,' says Mr Camacho of Credit Suisse.

The other imperative is continuous enhancement of Singapore's infrastructure. 'Infrastructure covers many elements,' says Mr Apte of Citigroup, who himself left Hong Kong this year to live in Singapore. 'Schools as well as medical and recreational facilities are as important as, say, transport infrastructure. Without these, people would not move here.'

To a banker living in Singapore, the city offers a broader, more interesting menu of choices in 'cuisine, arts and culture now than when I was here with Bankers Trust in the early 1990s', says Mr Camacho. 'Sure, the cost of living has gone up, but then you would expect that in any global city.'

Financial regulators will have an unenviable job policing capital that now flows through many more nodes than before. Whereas in 1980 funds largely moved between developed markets - and between developed markets and Hong Kong and Singapore - by 2005, significant sums of money were beginning to traverse the world in many directions.

In this new, more complex scheme of things, Sao Paulo is important, as are Mumbai, Shanghai, Busan and Shenzhen. The more complicated the machine, the bigger the risk of a spectacular breakdown. What is needed is a regulator that is transparent, not beholden to dogma and open to feedback and consultation.

Through a colleague, Mr Srinivasan of Allianz did help arrange that meeting between MAS and the European investment office looking to set up operations here.

'I'm not aware of the outcome, but the ease with which a credible person can get an audience with the regulator here is remarkable,' he says. 'At a time when other financial centres are being hit by regulations, some of which one might argue are unnecessary, Singapore has maintained a pragmatic stance of sensible regulation.'